Fire And Ice

Fire And Ice

Why even industry leaders need to diversify.

When the weather outside is frightful, the sales can be delightful—at least for those businesses that thrive when Mother Nature delivers classic amounts of snow and cold. Unusually warm and dry spells, though, can leave these same businesses vulnerable. Which brings up the subject of business vulnerability, and how to reduce it as much as possible.

After the next time you’ve plowed out your driveway, there’s a good chance that you or somebody you know is going to go snowmobiling, because Minnesota is home to more than 258,000 registered snowmobiles, more than any other state. There’s also a good chance that your sled was made right here in Minnesota, which is home to two of the world’s four largest snowmobile makers, Arctic Cat and Polaris.

In Minnesota it’s estimated that $100 million is spent annually on snowmobile equipment purchases. The overall snowmobile industry in the state, including tourism, generates between 7,000 and 8,000 jobs, and $1 billion in economic impact in this state alone, according to the Minnesota United Snowmobiling Association. All of this helps feed annual snowmobile sales of about $282 million for Arctic Cat and more than $300 million for Polaris.

While snowmobiling remains the largest winter sports revenue generator, the state also benefits from other cold- and snow-dependent activities like snowboarding, skiing, skating, hockey and sledding, which heat up the cold-weather sales coffers. TCB estimated in 2011 that youth hockey alone in Minnesota generates $100 million annually. (Even businesses that might not come to mind immediately see an uptick in revenue in the winter, such as those that deal with the literal impact of winter sports. Orthopedic clinics treat more than 440,000 winter sports injuries nationally and account for up to 25 percent of all emergency room visits.)

But what about those winters where, across the country, we just don’t get as much snow as usual? Talk about bad for business. Arctic Cat and Polaris long ago realized they needed to reduce such vulnerability by diversifying into areas their customers would find comparable enough to buy into.

Arctic Cat started as a snowmobile maker, but today it generates more revenue from the sales of its all-terrain vehicles and side-by-sides. For those of you not familiar with side-by-sides, they’re essentially a two-seater ATV miniature truck. These vehicles produced 45 percent of the company’s annual revenue in its fiscal 2014, compared with 39 percent from snowmobiles and 16 percent from parts, garments and accessories. To its credit, Arctic Cat did increase its retail snowmobile sales a hefty 19 percent, compared with 11 percent for the category as a whole that year.

If Arctic Cat is a good example of diversifying, Polaris takes after the star for which it’s named by being one of the brightest examples of marketing savvy. Like Arctic Cat, Polaris started as a snowmobile company. In fact, the founder of Polaris, Edgar Hetteen, left to start Arctic Cat back in the 1960s after management issues arose at Polaris.

Like Arctic Cat, Polaris now sees the majority of its $3.7 billion in annual sales coming from the off-road, or ATV, business, which accounted for 67 percent of total product sales in 2013. The company derives exactly the same percentage from its parts, garment, and accessories as Arctic Cat, at 16 percent, but that’s where the similarities end: Snowmobiles now account for only 8 percent of its annual sales.

The other area of diversification for Polaris came with motorcycles; first with its own Victory model, which rolled out in the mid-1990s but has been slow to catch on in the market, and more recently with the acquisition of the iconic Indian motorcycle brand. This move helped rev up sales for its cycle business. The Polaris brands still have a ways to go before they catch up to Harley-Davidson, but their revenue growth is beating that of its biggest competitor.

Today, if we have a mild winter, sales won’t melt for Arctic Cat and Polaris as they once did for the entire snowmobile industry (which is one reason that industry as a whole nearly collapsed a few decades ago).

Just as Arctic Cat and Polaris realized, smart marketers know to diversify their product offerings so they’re not susceptible to seasonal weather fluctuations, or other variables. But that can sometimes be easier said than done.

The question to ask: How vulnerable is your business—and why? Yours may not be affected by weather, but what else might impact your sales? Is it price sensitivity, being stuck in a rapidly overcrowding category or susceptibility to something else? And if it is vulnerable, how can you diversify as intelligently as these two companies did?

Glenn Karwoski (g.karwoski@creativepr.com) is founder and managing director of Karwoski & Courage, a marketing communications agency. He also teaches in the graduate school at the Opus College of Business at the University of St. Thomas.

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